Arch Coal works out bonding deal that keeps its big Black Thunder mine open

Arch Coal, which sought Chapter 11 bankruptcy protection on Jan. 11, has worked out a new reclamation bonding deal with the state of Wyoming that will allow it to keep operating its massive Black Thunder mine in the Powder River Basin, which is the second-largest coal mine in the U.S. and supplies a number of U.S. power plants with coal.

Arch on Feb. 9 filed with the U.S. Bankruptcy Court for the Eastern District of Missouri a settlement with the Wyoming Department of Environmental Quality on reclamation bonding needs. Federal and state laws require mine operators to hold reclamation bonds, often issued by specialty insurance companies, that ensure money for reclamation of a permitted mine site if the operator goes bankrupt. Since 2004 in Wyoming, Arch Coal has been self-bonding some of its operations, meaning it provides its own reclamation insurance. The court is due to hold a hearing on the settlement on Feb. 23.

Arch Western Resources LLC, through its wholly owned subsidiaries Thunder Basin Coal Co. LLC and Arch of Wyoming LLC, and also Energy Development Co. (EDC), operate seven surface coal mines in Wyoming, known as the Black Thunder, Coal Creek, Medicine Bow, Vanguard, Seminoe II, Izita and Carbon Basin mines.

  • Black Thunder is a surface coal mine in Campbell County that has operated since 1977 and extracts coal from coal seams that average approximately 75 feet in thickness. Black Thunder is one of the largest single coal mining complexes in the world and was the first coal mine to ship 1 billion tons, with 101.2 million tons shipped in 2014.
  • Coal Creek is a surface coal mine in Campbell County that began operation in 1979 and extracts coal from coal seams varying from 14-25 feet in thickness. Arch shipped 9.4 million tons of coal from Coal Creek in 2014. Coal Creek, like Black Thunder, is in the Powder River Basin, but relatively high production costs and low-Btu content for Coal Creek’s coal has kept this a relatively small operation.
  • The Medicine Bow operation is a surface coal mining area in the Hanna Basin of Carbon County which began mining in 1975 and actively mined in several different Hanna Basin Coal seams through 2003 producing approximately 42,800,000 tons of coal. This operation is near fully reclaimed and in the final stages of Reclamation Performance Bond Release.
  • The Vanguard operation was a surface/underground coal mining complex operated by Energy Development Co. in the Hanna Basin of Carbon County which began mining in 1970 and actively mined through 1983 producing approximately 11,200,000 tons of coal. This operation is fully reclaimed and in the Formal Phase 3 Reclamation Bond Release process, which is expected to be complete in April 2016.
  • The Seminoe II operation is a surface coal mining area in the Hanna Basin of Carbon County which began mining in 1973 and actively mined in several different coal seams through 2003, producing approximately 34,300,000 tons of coal. This operation is near fully reclaimed, and the reclaimed lands are in the final stages of Reclamation Bond Release. The Seminoe II facilities remain in place as a potential crushing and shipping location for coal mined from the Carbon Basin operation.
  • The Izita operation was permitted as an equipment walk route between the Black Thunder and Coal Creek mines. To date, all disturbance associated with the walk route has been reclaimed. There was no coal production associated with this permit.
  • The Carbon Basin operation is a surface/underground coal mining complex in the Carbon Basin of Carbon County which mined a small portion of its total coal reserve between 2006 and 2009, producing approximately 622,100 tons of coal, in order to maintain the coal lease with the U.S. Department of the Interior. Reclamation of all surface mine pits and associated disturbances from this mining activity has been fully performed and the operation has achieved Phase 2 Reclamation Bond Release.

Collectively, Arch’s Wyoming operations employ approximately 1,700 people, and these mines shipped 110.6 million tons of coal in 2014. This coal is shipped principally by rail throughout the western, midwestern and southern United States, nearly all to generate electricity.

Arch says needed reclamation would cost less than the bonding total

For calendar 2014, the WDEQ set the amount of the debtors’ required reclamation bonds for the Wyoming Mines, in the aggregate, at approximately $485.5 million. The Arch debtors estimate that, based on the current disturbances at the Wyoming Mines, it would cost them significantly less than $485.5 million to perform the reclamation. Under Wyoming law, a mine operator remains liable for reclamation costs that may arise in connection with a former mine site during a minimum liability period that extends at least five to ten years (depending on certain factors) after the operator’s reclamation work is completed. Once this liability period has expired, a mine operator that has performed reclamation work in compliance with applicable law can formally request that the WDEQ release the operator’s bond.

The debtors have been authorized to self-bond in respect of their reclamation obligation relating to their Wyoming Mines since September 2004, in the case of Thunder Basin, and January 2008, in the cases of Arch of Wyoming and EDC. The debtors currently self-bond substantially all of their Wyoming reclamation obligations.

In the period leading up to the Jan. 11 bankruptcy filing, the debtors spent significant time and resources considering the possibility that the financial condition of the debtors or the commencement of these bankruptcy cases might cause them to forfeit their right to self-bond with respect to their Wyoming reclamation obligations. Said the Feb. 9 motion: “In particular, the Debtors were mindful of the fact that in May 2015, Wyoming had issued a substitution demand to Alpha Natural Resources, Inc. and certain of its subsidiaries (collectively, ‘Alpha’), which would have required Alpha to replace the full amount of its self-bonds with third-party commercial surety bonds or other financial assurances.”

Alpha is a competing coal producer with two mines in the Powder River Basin that is also in Chapter 11 bankruptcy protection.

“In light of these concerns, the Debtors sought to secure a means of providing financial assurances to Wyoming without having to obtain additional third-party surety bonds or posting additional collateral, each of which, if achievable at all, could entail significant expense and directly impact the Debtors’ liquidity position,” said Arch. “Accordingly, pursuant to the DIP Order (as defined below) the Debtors obtained the consent of their prepetition senior lenders and postpetition lenders to provide a carve-out from their collateral for bonding purposes (the ‘Bonding Carve-Out’), pursuant to which the Debtors are authorized to provide the WDEQ with a claim of up to $75 million (a ‘Bonding Superpriority Claim’) having priority over any or all administrative expenses of the kind specified in section 503(b) of the Bankruptcy Code, which claim is payable ahead of all other claims from the proceeds of the lenders’ collateral.

“Immediately following the Petition Date, the Debtors commenced discussions with the WDEQ regarding their self-bonded obligations. During these discussions, the WDEQ indicated that, unless the Debtors could provide them with sufficient additional financial assurances, it was contemplating the issuance of a substitution demand to the Debtors for their self-bonded obligations, potentially to be followed by a Notice of Violation and Order at the appropriate time.

“The Debtors have limited ability to satisfy such a substitution demand. The posting of more than $485 million in collateral to support the performance of the Debtors’ reclamation obligations and permit the continuation of their Wyoming operations would require the Debtors to devote more than 80% of their current liquidity to support the Wyoming bonding obligations of just four Debtors, Arch Western Resources, Thunder Basin, Arch of Wyoming and EDC, leaving the remaining Debtors with woefully insufficient liquidity to operate their businesses. Additionally, posting cash collateral in such an amount is not authorized under the terms of the Debtors’ debtor in possession credit agreement dated as of January 21, 2016 (as it may be modified or amended, the ‘Credit Agreement’), which was approved on an interim basis by an order of this Court entered on January 15, 2016. Moreover, the option of providing commercial surety bonds or letters of credit in the required amount provides no viable alternative because, in addition to the expense of posting such surety bonds or letters of credit in terms of premiums and administrative fees, the Debtors would be required to provide significant collateral to support their obligations under any such surety bonds or letters of credit.

“The Debtors believe that the ability of Wyoming to require the Debtors to post additional collateral or a bond as a condition to the Debtors’ continued operation in Wyoming is stayed under, or otherwise prohibited by, the Bankruptcy Code. Wyoming, however, does not agree that such actions are stayed or otherwise prohibited. Absent a resolution of this dispute, upon the expiration of the automatic stay, Wyoming will allege that an automatic permit block has taken effect with respect to Arch Western Resources, Thunder Basin, Arch of Wyoming and EDC, and the WDEQ would be authorized to seek to permanently block the issuance of new or amended permits to those Debtors. The WDEQ also could take actions to revoke the Debtors’ licenses to mine in Wyoming, which could, in turn, lead to permitting issues in other states.

“After extensive negotiations, however, the Debtors and Wyoming have reached a resolution of this dispute as set forth in the Stipulation and Order. As set forth in the Stipulation and Order, the Debtors, Wyoming and the WDEQ have agreed that, commencing on the date that the Stipulation and Order is approved by the Court, through the Compliance Plan Period, (a) Wyoming shall not issue a substitution demand with respect to the Debtors’ self-bonded obligations; (b) Wyoming shall have, pursuant to, as applicable, sections 105, 364 and 503 of the Bankruptcy Code, and solely in the manner and to the extent permitted as a Bonding Superpriority Claim under the DIP Order, an allowed superpriority claim having priority over any or all administrative expenses of the kind specified in section 503(b) of the Bankruptcy Code in the amount of $75 million (the ‘Superpriority Claim’) against each of Arch Western Resources, Thunder Basin, Arch of Wyoming and EDC to secure the Debtors’ reclamation obligations related to the Black Thunder, Coal Creek and Vanguard mines (provided that under no circumstances will Wyoming recover more than $75 million on account of the Superpriority Claim); (c) within ninety days of approval of the Stipulation and Order, the Debtors shall substitute their self-bonds with financial assurance in the form of third-party collateral support in the amount of $17,004,600 to secure the reclamation obligations related to the Medicine Bow, Seminoe II, Izita and Carbon Basin mines; and (d) the Bonding Carve-Out (and thus the Superpriority Claim) will not be terminated, as permitted under the DIP Order or otherwise, except in accordance with the Stipulation and Order.”

Arch later added: “If the Debtors were to litigate this dispute and fail, they would be faced with the limited options of closure or fire sale of the Wyoming Mines — if such a sale would be possible in the current environment — which could potentially impact the Debtors’ operations in other states and would, at a minimum, be very disruptive to their restructuring efforts and the livelihood of the approximately 1700 employees who work at the Wyoming Mines. Therefore, the Debtors have concluded that the benefits of the Settlement substantially outweigh its costs.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.